Business and tax

Isn't tax avoidance a problem for government?

Yes, but only in part. Governments create tax laws and have the job of tackling tax avoidance, which they have done with varying degrees of success over the years. However, there are three points to make.

First, corporation tax is often presented as a burden, but it shouldn’t be. Not when considered against the huge array of public services it helps fund – from education, health and old-age care, through to flood defence, roads, policing and defence. It also plays a crucial role in holding the whole tax system together – helping to counter financial inequalities and rebalance distorted economies. However, it has been estimated that as a result of corporate profits being shifted to tax havens, revenue losses in the UK amount to at least £7bn per annum. Looking at the behaviour of corporate taxpayers is vital if tax losses are to be curtailed. In an age where convenience and price are key drivers affecting consumer choice, it is important to factor in the hidden costs of shopping at, or buying services from, a business aggressively maximising profit at the expense of contributing its fair share of tax. Recent polling in the UK (May 2019) has found that over three quarters of people would rather shop with (77%) or work for (78%) a business that can prove it is paying its fair share of tax – in both cases, up eight percentage points on 2018. An increasing number also said that it was important to celebrate businesses who can demonstrate good tax conduct and shun the artificial use of tax havens and contrived tax avoidance practices, up six percentage points on 2018, to 75%.

Second, a great deal of tax avoidance is done internationally and since there is no international government to police this, we need to look to individual companies to help leverage change by standing up for responsible tax conduct. This means both putting thier own house in order and standing up for (and not opposing) legislation that seeks to clamp down on tax avoidance and evasion – and thus level the playing field and enable business to compete more fairly.

Third, there is no legal duty for a company to avoid tax or minimise its tax contributions. The pursuit of tax avoidance by business is an active choice and unfair burden on society, and needs to be seen as such. Back in 2016, the head of Business in the Community observed that tax avoidance scandals undermine public trust and that the subject is now the “open sore” of corporate responsibility. Responsible tax conduct should be front and centre of all credible corporate social responsibility programmes – it supports not only the UK’s tax base and the public services this supports, but also creates fairer conditions for those business who actively endeavour to pay the right amount of tax in the right place at the right time.

Don’t companies have a legal duty to maximise profits and minimise tax payments?

This is an urban myth. Companies have no legal duty whatsoever to maximise their profits in the UK. Rather, a company’s directors have a legal duty to promote the success of their company; with that duty both widely defined and subject to considerable constraints. As set out in the Companies Act 2006:

172: Duty to promote the success of the company

(1) A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to—

(a) the likely consequences of any decision in the long term,

(b) the interests of the company’s employees,

(c) the need to foster the company’s business relationships with suppliers, customers and others,

(d) the impact of the company’s operations on the community and the environment,

(e) the desirability of the company maintaining a reputation for high standards of business conduct, and

(f) the need to act fairly as between members of the company.

(2) Where or to the extent that the purposes of the company consist of or include purposes other than the benefit of its members, subsection (1) has effect as if the reference to promoting the success of the company for the benefit of its members were to achieving those purposes.

(3) The duty imposed by this section has effect subject to any enactment or rule of law requiring directors, in certain circumstances, to consider or act in the interests of creditors of the company.

As is clear, profit maximisation is not referred to. It is true that the ‘success of the company for the benefit of its members’ clearly implies a duty to generate profit, or at least a positive cash flow, but that is not the same as maximising profit. In any case, the duty to the members is constrained, as set out in sub-paragraphs a to f.

The pursuit of tax avoidance is not only not encouraged, but is contrary to the broader regards that are advocated for by company law. For example, it may harm the long-term interests of the company via reputational damage and impact negatively on local communities.

Why pursue responsible tax conduct?

At the Fair Tax Mark we are finding that different types of corporation have different key motivators.

  • Investors are increasingly pressing listed companies to explain their management of tax risk, and so we are seeing a big increase in transparency around tax strategy, governance and internal controls (for example, in 2017 we partnered with the Local Authority Pension Fund Forum (LAPFF) on an analysis of tax strategy reporting among the FTSE 50).
  • Coops and social enterprises see this area as the next big thing in corporate responsibility, and want to be ahead of the curve and demonstrate their social mission.
  • Public sector suppliers and service providers are finding that demonstrable fair tax credentials help win and maintain Government and municipality contracts (not least as we have now launched a Councils for Fair Tax Declaration).
  • High-street retailers, who have regular contact with personal customers, view good tax conduct as a customer priority and strong brand differentiator.

Being transparent on tax helps companies to communicate what they’re doing to consumers, clients, investors and the general public. It also enables stakeholders in civil soceity – such as the public, journalists, non-governmental organisations and consumers – to discern what a company is paying, hold them accountable and celebrate responsible tax conduct. 

Julian Richer, Founder and Managing Director, Richer Sounds: “Richer Sounds is proud to pay the tax it owes. It’s only fair that businesses contribute to the infrastructure that enables us to operate, from the roads which transport our goods, to the NHS for keeping our team healthy, the police that protect our property and the schools that educate our people. As a Fair Tax Mark certified business I know that we’re benchmarking our tax conduct against a robust, independent standard. It’s about fairness. Businesses should pay their way and compete on a level-playing field.”

Rachel McEwen, Director of Sustainability, SSE: “What I find frustrating is that a few bad apples can tarnish the reputation of so many.  Profitable companies like SSE create hundreds of thousands of direct and indirect jobs, build and upgrade essential infrastructure to keep the lights on. Its tax contributions help support the services we all need to thrive.  Tax pays for the schools we learned in, the hospitals that treat us, the roads that get our goods to market and the security we get from emergency services. Tax is a social contract with society and it goes without saying it is businesses’ duty to pay their fair share.”

James Timpson, Chief Executive, Timpson Group: “We are happy and proud to pay our taxes and have always strived to pay tax in the spirit of the law, rather than pursue tax avoidance schemes, which albeit legal, hardly promote a level playing field or a fair contribution to the communities in which we trade.”

Detailed here is an interview with the Corporate Responsibility Manager at Leeds Building Society, which sets out why they pursued Fair Tax Mark accreditation.

Why focus on corporation tax: don’t businesses contribute to other taxes as well?

Companies do pay many taxes to government. In some cases, like the PAYE and national insurance they collect from staff, and the VAT they collect from customers, the company simply acts as an tax collector for HMRC.

Other taxes, like business rates, landfill taxes and airport duties, are arguably payments for services provided and more akin to business expenses.

Significantly, it is corporation tax alone that has to be disclosed separately in a set of accounts with related analysis. Corporation tax is unique in being a tax on the company and is also unique in having information disclosed on the sums due. The Tax Justice Network convincingly argue in ‘Ten Reasons to Defend the Corporation Tax’ that it is “one of the most precious of all taxes” and plays a crucial role in holding the whole tax system together – helping to counter financial inequalities and rebalance distorted economies. For example, if corporation tax were to be abolished (or is set too low), then personal shell companies would proliferate as unscrupulous wealthy individuals sought to avoid personal income tax.

That is why we focus our attention here. Not least via intiatives such as Fair Tax Week – which looks to celebrate the companies and organisations that are seeking to do the right thing and are proud to pay their fair share of corporation tax – i.e., businesses that pay the right amount of corporation tax at the right time and in the right place, and who overtly shun the artificial use of tax havens and contrived tax avoidance practices.

What do you mean by fair?

We believe that that tax conduct is ‘fair’ when a business pays the right amount of tax in the right place at the right time. This means that if a profit is made in the UK then it should be taxed there too – at the time it was earned, and not shifted to another country to be taxed there at a lower rate. It’s about acting in accordance with the spirit – as well as the letter – of the law.

Each and every organisation that has secured a Fair Tax Mark has needed to make changes in order to realise accreditation. We are not in the business of rewarding standard practice. As part of our assessment we review policy, reporting and current tax payments (over three or four years, depending on the applicable standard) and provide suggestions for improvement. Organisations that are paying lower rates of current tax need to engage in extra transparency in order to secure certification. The feedback from accredited business is that the process of accreditation is a valuable means to benchmark performance and move towards best practice. They appreciate that we set the bar high and see this as a valuable asset in an area where trust is low.

In practice this means evidencing a tax policy that provides clarity on key matters such as shunning an undue presence in tax havens and a lack of appetite for tax avoidance schemes and profit-shifting. Together with enhanced transparency in the tax notes detailed in financial statements (especially when it comes to clarity on current tax and deferred tax payments, as well as total tax). There will be many legitimate instances when a business does not pay corporation tax at the headline rate, such as when they post losses, or utilise tax reliefs in connection with topping up their staff pension pots or capital investments. Therefore, it is vital that enhanced transparency provides a clear narrative explanation alongside a detailed numerical reconciliation.

But doesn't everyone avoid tax?

A scan of the daily news media would indicate that tax avoidance is endemic across the UK and everyone is ‘at it’. An observer might, therefore, be inclined to conclude that if everyone is ‘at it’ then it can’t be that big a deal, and they might as well indulge in tax avoidance themselves.

But, in fact, most of us are not engaged in tax avoidance at all. A myth has been spun which tells us that if we buy duty-free at the airport or invest in an ISA or top-up up our pension then we are tax avoiders – and so we need to back off criticising the likes of Amazon and Apple as its just plain hypocrisy. Wrong. No tax is being avoided as no tax is due. For the majority of us, the day-to-day utilisation of such tax reliefs is within both the spirit and letter of the law and should be more correctly referred to as tax planning. There is nothing to feel guilty about, and those that say there is are ignorant or (more likely) seek to deliberately muddy the waters in order to de-stigmatise the immorality of tax avoidance.

Tax avoidance relates to, in HMRC’s words: “bending the rules of the tax system to gain a tax advantage that Parliament never intended… (it) involves operating within the letter – but not the spirit – of the law.” With tax evasion being against the letter of the law, and therefore illegal (ie, when people or businesses deliberately do not declare and account for the taxes that they owe).

If we tax business more, won’t they just withdraw from the country?

There are three reasons why this rarely proves to be true.

First, the UK is a very big market for any company (the fifth largest in the world, as measured by GDP) and few, if any, would forego the chance to make profits here even if they had to pay more tax on those profits. Google have, for example, said that: if they don’t pay tax it is only because the rules allow that outcome. They have said if the rules were different they would pay more and that any rational company would do the same.

Second, because of recent changes to UK corporation tax, UK companies only pay tax on the profits they make in the UK and not elsewhere. As a result, there is no incentive for a head office company to leave the UK if it does not trade here as they’re now unlikely to have a UK tax bill in that instance. There is also reduced incentive for a company trading here to leave as their UK profits remain taxable (albeit, with the rather large assumption that no income shifting to a low tax jurisdiction is taking place).

Third, the vast majority of business understands that tax is a price worth paying for access to quality infrastructure, well-educated workers, robust research and development, and well-functioning administrative and legal systems.

By and large, tax rates have little effect on where the vast majority of corporations do business, although they can have a significant effect on where an unprincipled minority of corporations claim (to tax authorities) to do business!

Use of the Mark: Terms and Conditions

How much does the Fair Tax Mark cost?

Licensing fees are banded according to a company’s turnover. Half the fee is paid in advance and covers the cost of an assessment. The second half of the fee then purchases the licence to use the Mark for a period of one year.

See our full price list.

Can I renew the use of the Fair Tax Mark after a year?

Yes; you’ll need to disclose all the information as per the first year of signing up, though some of it may need very little refreshing, such as your tax policy. We’ll support you through the process.

What happens if the ownership of my company changes during the year covered by the licence agreement. Will this affect the Fair Tax Mark?

It may do. There is an obligation within the terms of the agreement to inform us of any changes. Drop us a line and we’ll figure it out together.

Is there a risk of you changing the Fair Tax Mark criteria so we suddenly lose our eligibility?

We don’t envisage updating our scoring criteria until 2018 at the earliest. When we do begin an updating process, our companies will be consulted and given a 12 month courtesy period to implement any changes needed to ensure they can maintain their Mark.

My company passed the assessment and I’d like to buy a Mark but I’m not planning on re-designing my marketing materials for another six months. Can I delay when I actually sign up for the scheme?

Yes. You can choose to start using the scheme whenever you like, providing that in the interim nothing has changed to either your company ownership or you have not released a new set of accounts. If anything has changed Fair Tax Mark will undertake to re-rate your company to ensure that it still meets our criteria.

What are the guidelines for using the Fair Tax Mark?

They are contained within the licensing agreement.

Can I use the FTM in another country given it's been designed for the UK?

Currently the Fair Tax Mark is focused on UK companies but it has always been our intention to extend it for use in other countries. This requires further development of the methodology. If you can support this development financially, please feel free to get in touch to see how we might work together.

If we haven’t answered your question in the FAQs above please get in touch.

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